Hungary Supreme Court Rules Forex Loan Margin Was Unfair

Arpad Kasler, plaintiff in the case against OTP Bank in front of the Kuria building

MTI / Szilard Koszticsak

BUDAPEST–Hungary’s supreme court ruled Tuesday that using a bid-sell margin as part of a foreign-currency loan contract of the country’s biggest bank OTP Bank Nyrt. was unfair.

The ruling only affects one particular contract and has a limited impact on the banking sector but similar rulings may be appearing in future cases. A ruling on a wider range of issues–including sharply higher mortgage payments due to the weaker forint–is expected in two weeks’ time.

Hungary’s laws aren’t precedent-based therefore rulings aren’t affecting future cases, especially because all the contracts are different, OTP Bank said in an e-mailed statement. OTP’s share price dropped 2% after the verdict and closed at that level Tuesday afternoon.

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Some banks including OTP calculated the amount stated in Swiss francs on the basis of the buy rate of the bank on the day the funds were made available, but calculated the reimbursement on the basis of the sell rate of the bank the day before the payment was due, acting in the bank’s own favor.

The court decided that was an abusive clause in the loan contracts, and ruled that the National Bank of Hungary’s exchange rate has to be used in the contract, in line with the European Court of Justice’s April call.

A rough calculation puts the amount overcharged across all foreign currency mortgages, assuming cross-applicability of this ruling across the sector and constant profit spreads, at around EUR150 million-EUR250 million, Nomura economist Peter Attard Montalto said in a note to investors. “Today’s ruling now potentially makes all banks liable for associated costs, which while small per month per contract accumulate over all forex mortgage holders and over all history of forex mortgages,” he said.

The banking sector profit outlook is close to zero for the coming years. Banks are already provisioning for these issues to some degree but uncertainty over the final extent of forex mortgage reform makes this a difficult exercise.

The Kuria’s body of judges will discuss on June 16 whether the ruling applies to all foreign currency loan contracts with banks. The body will decide whether it’s unfair that the debtor takes all foreign currency exchange rate risk; whether the contract foreign currency exchange rate was transparent; under what circumstances is the bank allowed to make unilateral changes to the contract; and whether the central bank’s foreign currency rate should be applied instead of the particular bank’s bid-sell rate.

The decisions will potentially affect around half a million foreign-currency mortgage contracts in Hungary worth 3.5 trillion forints ($15.38 billion).

Foreign-currency loans were vastly popular in Hungary prior to the financial crisis because they were much cheaper to service than forint loans. But the matter became a political issue following the sharp appreciation of the Swiss franc during the global financial crisis. The Fidesz party government has repeatedly said it wants a relief system to ease the burden on borrowers who took out the loans before 2010 and now face high payments after a dramatic slide of the forint, and pledged to cut the amount of household foreign-currency debt to zero.

Mihaly Varga, the country’s economy minister, said the government plans any steps that address the issue in collaboration with market participants such as the biggest trade group the Banking Association.

“A solution that helps foreign currency debtors without endangering banking sector stability is in everyone’s best interest,” Mr. Varga said on state radio MR1 Kossuth on Monday.

This is just one of the yet unresolved issues related to foreign currency loan contracts in Hungary on which the Kuria has to make its verdict, Societe Generale economist Phoenix Kalen said in a note to clients.

The other issue–whether banks’ unilateral changes in interest rates during the life of the mortgage were fair and justified–will likely come during the course of this autumn.

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